Differing Effects of the Global Financial Crisis on the Central Asian Countries: Kazakhstan, the Kyrgyz Republic and Uzbekistan

Abstract

Kazakhstan, the Kyrgyz Republic and Uzbekistan are neighbouring countries in post-Soviet Central Asia which share similar culture and language. Their economic structures were similar under central planning: they provided the agricultural basis to the Soviet economy. But, since independence, these economies have grown structurally more heterogeneous due to variations in the implementation of market-oriented reforms, the degree of integration into the global economy and natural resource endowment. This article attempts to demonstrate how this heterogeneity can explain the differing effects of the recent Global Financial Crisis on these countries' economies in general and in the banking sector in particular.

Notes

This article is dedicated to the memory of our colleague Dr Dipak Ghosh of Stirling University whose life prematurely ended on 11 January 2010.

¹ Uzbekistan started market-oriented reforms later and at a slower pace than Kazakhstan and the Kyrgyz Republic in 1992 and 1993. The pace of reforms was accelerated in 1994 and 1996 when, following policy advice from international financial institutions such as the IMF, such important reforms as liberalisation of trade and consumer prices, abolition of central planning in agriculture, and institutional reforms in the financial sector were carried out. But, due mainly to falling prices for the country's two main export items, cotton and gold, in 1996 and 1997, the government introduced the exchange rate and other trade-related restrictions in 1996. Other reforms also came to an abrupt halt in the late 1990s. Unwillingness of the government to adhere to its reform commitments frustrated the IMF and it suspended its stand-by agreement in 1996. Although the slow and cautious approach to transition was successful in preventing sharp output loss and the consequential rise in unemployment and social strife during the early years of transition, by 2000 it was apparent that the economy was simply stagnating. So, in 2001, the government hastily announced a wide range of macroeconomic reforms. Wary of the forceful nature of the IMF's stand-by agreements, the authorities signed its softer version, a so-called staff monitored programme, under which the IMF would not provide any financial support and therefore could only oversee the reform progress. Under this programme, the authorities promised to carry out a comprehensive set of reforms including unification of multiple exchange rates, introduction of current account convertibility, improving the state procurement prices for raw cotton and wheat in agriculture, and abolishing directed credits to the economy. But, again, in reality these reforms were implemented only partially and with limited success. Perhaps the most notable success was the unification of multiple exchange rates by allowing large devaluation of the national currency and acceptance of obligations under Article VIII of the IMF's Article of Agreement (Ruziev et al. 2007, p. 15; Pomfret 2010).

² According to World Bank estimates, in 2009, gross national income per capita was $6,740 ($10,270 in PPP terms) in Kazakhstan; $1,100 ($2,890 in PPP terms) in Uzbekistan; and $870 ($2,200 in PPP terms) in the Kyrgyz Republic.

³ In 2002, the Paris Club of Creditors (PCC) rescheduled approximately $100 million of its loans to the country. In 2005, the PCC cancelled around $124 million borrowed before 31 August 2001, including the loans rescheduled in 2002. In addition, in 2005, the PCC also rescheduled approximately $430 million according to the following terms: 50% of commercial credits owed to the PCC were cancelled, and the remaining amount was rescheduled to be repaid over 23 years with a seven-year grace period; official development aid credits were also rescheduled to be repaid in 40 years with a 13-year grace period; interest payments on these loans were also allowed to be capitalised and be paid over 23 years with a seven-year grace period (Club de Paris 2005).

⁴ Until very recently the Russian pipeline transport system was the only export route available for Central Asian gas suppliers. Russia used to buy gas from these countries at discounted rates calculated using the ‘cost-plus’ system according to which price per unit of gas is determined by the operational costs of producing a unit of gas, cost of its transportation to the delivery point, plus a reasonable rate of return. However, this was about to change as the Central Asian gas exporters sought to diversify their export routes. Construction of a new pipeline route to China with an annual transport capacity of 40 billion cubic metres, which was inaugurated in December 2009, and discussions about building a new route to Europe (the Nabucco pipeline) that would bypass Russia (Tekin & Williams 2009), clearly played the role of catalyst in Russia's offer of a switch to a ‘netback-replacement-value’ pricing system which it used for decades to sell its own gas and re-export Central Asian gas to Europe. Under the netback-replacement-value system price per unit of gas is determined by the replacement value of competing fuels for the end user, netted back to a delivery point (less transportation costs). The price of gas under the netback value principle is usually higher than that under the cost-plus system. In 2008, when the agreement was made, it was estimated that the average price of gas per thousand cubic metres would increase from around $140 to around $225–295 under the new pricing formula. Following the new agreement, Uzbekistan increased its natural gas exports to Russia by 41% in 2009 (ADB 2010a, p. 128).

⁵ By and large, the Kumtor mine has been the biggest source of gold production for the Kyrgyz Republic, producing around 20 tons of gold annually. Only with less than one third of the proved reserves remaining, the production of gold is likely to decline from this site in future. However, the start of production in two relatively large new gold deposits, Taldybulak and Jerooy respectively, may counter this decline. Uzbekistan's main gold deposits, such as Uch-Quduq, Zarafshan and Muruntau, are located in the Navoiy region in the north-west of the country.

⁶ Hidden unemployment was referred to by Kornai (1992, p. 223) as ‘unemployment on the job’.

⁷ Maksakova (2008, p. 64), based on a slightly different definition of the labour force, the able-bodied population head count, also estimated the unemployed rate to be around 32.5% in 2006 in Uzbekistan.

⁸ According to the IMF (2008b, p. 5), remittances from Kazakhstan to the Kyrgyz Republic and Uzbekistan were equivalent to 6.5% and 0.8% of the latter countries' respective GDPs. Moreover, around one fifth of the Kyrgyz Republic's remittances income originated from Kazakhstan.

⁹ There was a parallel market premium over the official exchange rate in Uzbekistan in the 1990s, reaching around 500% by 2000. The multiple exchange rates were unified by allowing large devaluation of the national currency (by some 600% between 2000 and 2003) towards the end of 2003. But, despite the accumulation of significant international reserves in recent years, the difference between the official and curb market exchange rates widened significantly again. On 7 April 2010, the official exchange rate was 1,556 soum per dollar and the curb exchange rate was 2,410 soum per dollar.

¹⁰ In the first quarter of 2007 alone, the Kazakh banks issued $5.6 million Eurobonds which was equivalent to 15% of the total emerging market corporate bond issuance during that period (IMF 2007, p. 9).

¹¹ Also known as the Oil Fund, the NFRK was created in 2000, and currently has around $50 billion in total assets. As with most sovereign wealth funds, the NFRK invests only in foreign assets. In contrast, Samruk-Kazyna, which also has around $50 billion in total assets, invests in the domestic economy. Samruk-Kazyna received 90% of the anti-crisis fund, while KazAgro Holding received the remaining 10% (IMF 2009b).

¹² The bursting of the real estate bubble had especially severe consequences on the balance sheets of the largest five banks, which together accounted for around 76% and 80% of the banking sector assets and loans, respectively, in 2008 (NBK 2009). BTA was the largest bank with 27% of the banking sector assets, followed by KKB (20%), Halyk (14%), Alliance (9%) and ATF (8%). The share of overdue loans (on a 90-day basis) in total loans was around 24% for BTA, 16% for KKB, around 22% for Halyk bank, 48% for Alliance and around 30% for ATF in April 2009 (IMF 2009b, p. 10).

¹³ Alliance requested a freeze on interest and principal repayments on its international debt in May 2009. BTA was forced to suspend scheduled principal and interest repayments in April and July 2009, respectively, after Nomura and Morgan Stanley unexpectedly requested early repayment of $550 million. The latter argued that Samruk-Kazyna's capital injection into BTA was a de facto nationalisation, which, according to the terms of the credit agreements, allowed them to request early repayments. But, independent observers argued that the main motive of international investors was simple: they lent to the BTA, but they also had credit default swap positions on BTA which would pay out only if the BTA defaulted (Tett 2009).

¹⁴ The off-budget sovereign wealth fund was established in 2006, and with capital of approximately $5 billion at the time of this study (Karimov 2010).

¹⁵ By sterilising the impact of reserve flows on the domestic money supply, the authorities were able to control inflation directly. In addition, sterilisation policies also helped the authorities to maintain the value of the national currency at a relatively high level. Overvaluation of the currency in real terms in turn also helped to push the prices of imported goods and services down, thus helping to keep the inflation rate below 10%.

¹⁶ The role of the Central Asian countries was to provide the agricultural basis for the Soviet economy, particularly cotton, wheat and animal husbandry (Luong 2002, p. 67).

¹⁷ Adams and Rustemova (2009) provide an excellent account of the differences in the styles of governmentality in Kazakhstan and Uzbekistan.

¹⁸ Oil prices went up from under $10 per barrel in 1998 to over $140 in mid-2008, leading to large capital inflows, credit boom and subsequent currency appreciation, also facilitating such non-productive activities as residential construction, trade and household consumption. Although the already weak non-oil sectors of the economy (Pomfret 2005, p. 863) might not have suffered directly from this typical Dutch disease scenario, the banking sector troubles will have a lasting impact on their growth prospects.